IRS Common MistakesMs. Greta P. Hicks
July 10, 2013 — 2,262 views
Oh Shucks Moments
Each of us who has prepared our own tax return or prepared returns for others have had an “Oh shucks moment.” It’s one of those moments when we look at the return – after it has been sent to the IRS – and recognize a “funny looking” transaction on the return; then comes sleepless nights, frantic e-mails, and desperate phone calls to mentors, trusted friends, and finally a tax professional.
Now is a good time to review filed returns, and what you should do to correct old mistakes and avoid future ones. Common Oh Shucks Moments include the following.
1. Did you have an interest in, or a signature or other authority over, a financial account in a foreign country, such as a bank account, securities account or other financial account? If so, did you mark “yes” on your Schedule B or did you forget and let the computer automatically mark “no?” So what is a foreign financial account and if the answer is “yes,” what do you do? Take a moment and think back on your clients and contemplate if any of them “might” have a foreign bank account. It could be a U.S. citizen who works in a foreign country, a U.S. citizen who married a foreign individual and lives in a foreign country, or a U.S. citizen who inherited foreign assets. If that U.S. citizen has over $10,000 in a foreign financial institution, a Form TD F 90-22.1 is to be filed.
2. You failed to make an election on the original return, so what do you do? It depends. Some elections and non-elections may be made or revoked on an amended return without IRS consent. Others must have IRS consent. Some cannot be made or revoked at all. The original return election stands as made or not made. But, there is a little known loophole on elections, Temp. Regs. 301.9100-2(b), which provides guidance if the taxpayer wants to take advantage of an automatic six-month extension to elect or revoke an election:
“An automatic extension of six months from the due date of a return excluding extensions is granted to make regulatory or statutory elections whose due dates are the due date of the return, or the due date of the return including extensions provided the taxpayer timely filed its return for the year the election should have been made and the taxpayer takes corrective action as defined in paragraph (c) of this section within that six-month extension period. This paragraph (b) does not apply to regulatory or statutory elections that must be made by the due date of the return excluding extensions.”
How do we know which elections or non-elections may be changed? Look at the fine print in the applicable code section. Example: IRC 179, 172, 469. Elections that the IRS scrutinizes closely include:
• Section 179 expensing election. Read the 2009 Instructions to Form 4562 for instructions applicable to 2009 calendar year returns. It will be posted on www.irs.gov “Draft Tax Forms.”
• Net Operating Loss (NOL) election to forgo the NOL carryback MUST be made on a timely filed original return. So often taxpayers say, “I wasn’t worried about filing because I knew I had a loss to carry over.” Wrong – the loss had to be carryback and absorbed in prior years with any remaining loss available for carry forward. Attach statement to the return by the due date including extensions. Corporations check the box on Schedule K. IRC 172(b)(3), 172(i) (3), 172(j)(3), Temp. Reg. 301-9100-12T.
• Passive Activity Loss (PAL) includes an election to group activities. This is an example of an election that must be made by attaching a “statement” to the return. Returns with PALs are frequently selected for IRS audit and one of the first questions will be, “How are your activities grouped? Let me see your election.” Grouping activities are important when the taxpayer is trying to meet the material participation test of 500 hours per activity per year. IRS Notice 2008- 64.
3. You left off a Form 1099 or W-2. It is easy enough to prepare and file an amended return for an information document that was not reported or properly reported on a return. However, the IRS document matching program matches original information documents to the original Form 1040. If there is a corrected information document, it may not be in the IRS system. If there is an amended Form 1040, the IRS system is not designed for the information document computer program to match with the amended return nor are there procedures in place for the IRS live person to look in the IRS system to see if an amended return has been filed. So what do you do? If either of these circumstances happens, respond to the IRS CP 2000 Notice that the item has been properly reported and provide a copy of the Corrected 1099 or the Amended 1040 (mark “Copy Only – Do Not Process”). Be sure to also attach a copy of the CP 2000 notice to your response. The IRS only keeps a code in the computer that certain correspondence has been sent to the taxpayer.
These are only a few of the Oh Shucks Moments that occur during any tax year, but they are the ones most common during this calendar year. Common causes include changes in the law, overlooking the fine print, or failure to get all the facts from the client/taxpayer. Perhaps an AICPA or vendor “Check Sheet” would be helpful, or maybe just taking one more minute while reviewing a return is all that’s necessary.
Ms. Greta P. Hicks
Greta P Hicks CPA
Greta P Hicks is a former IRS Examination manager and Ms Hicks currently serves on the Editorial Board of the Texas Society of CPAs and is Tax Editor of Today’s CPA. Greta is active on the TSCPA IRS Relations Committee and teaches seminars on IRS.